[Invest&Law] Court: "Splitting Company to Evade Debt... New Entity Also Jointly Liable for Debts"

Rehabilitation Filing Without Investor Consent
"New Entity Used as a Tool to Evade Debt"

A court has finalized a ruling that a newly established company must bear liability for damages incurred by its predecessor, after a startup, having received investment from a venture capital firm, filed for corporate rehabilitation without consent and created a new entity. Although the two companies had different names and representatives, the court determined that, considering the continuity of assets, personnel, and business operations, this constituted an act intended to evade debt obligations.

According to the legal community on November 18, the Civil Division 16 of the Seoul High Court (Presiding Judge Kim Inkyum) recently ruled in favor of venture capital firm A in part, in an appeal regarding a claim for stock purchase payments and other demands against newly established food company B, upholding the first-instance verdict.

Contract Breach Dispute Triggered by Rehabilitation Filing... Investor: "Both Predecessor and New Entity Liable for Damages"

In 2020, Company A, using funds from a government-backed fund-of-funds, created an investment fund for startups and acquired 300,000 redeemable convertible preferred shares (RCPS) of Company C, which manufactured and sold snacks for infants, for approximately 1 billion KRW (about 1 billion won). RCPS are shares that investors can convert to common stock or redeem for principal under certain conditions. The following year, Company A additionally purchased 500 million KRW worth of convertible bonds (CB) from Company C.

The conflict escalated in May 2022 when Company C filed for corporate rehabilitation with the court, despite opposition from Company A. The investment contract contained a clause requiring Company A's prior consent for significant changes to the company structure, such as filing for rehabilitation or bankruptcy. Company C violated this provision.

Subsequently, Company A demanded the exercise of its stock buyback rights and bond redemption on the grounds of contract breach, but Company C did not comply. Company A filed a claim totaling approximately 1.758 billion KRW, including the investment principal, penalties, and interest. The claim named not only Company C and its representative but also the newly established Company B. Company B had been created two weeks before Company C filed for rehabilitation, and Company A argued that Company B was established to evade the predecessor's debts.

Court: "Assets, Personnel, and Business All Continued... Substantively the Same Company"

The lower court partially upheld Company A's claim, ordering the defendants to jointly pay approximately 670 million KRW in damages. The court found that Company B and Company C were, in effect, the same entity and ruled that the new Company B must also be liable for the debts.

According to the ruling, Company B's stated business purpose of "manufacturing and selling feed" was identical to a new business line added by Company C in 2021. It was also revealed that Company C had entered into a distribution agreement with Company B, entrusting it with product sales. Some employees of Company C transferred to Company B, and intellectual property rights such as design rights were transferred without significant compensation. Even the business addresses of the two companies matched. The court stated, "The establishment of Company B was an abuse of the corporate system to achieve the unlawful purpose of evading Company C's debts."

Although only Company B appealed, the appellate court agreed with the lower court's decision. The appellate panel stated, "Company B's arguments are not substantially different from those previously raised. Even after reviewing the evidence lawfully examined in the appeal, the first-instance findings and judgment are justified." As Company B did not file an appeal within the designated period, the ruling has become final.

This content was produced with the assistance of AI translation services.